Automated investment management, or as it is more commonly known ‘Robo Advice’, continues to gather pace in developed financial markets. With its roots founded in the US, robo advice provides a web-based platform to help automate and simplify investment management for customers. In the past 12 months there has been a rapid increase in the number of robo advice tools available in Australia which seems to suggest that robo advice is not just a trend, but a movement that will become an everyday medium for providing financial advice.
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Is there a market for robo advice in Australia?
In the past year there has been a rapid increase in the number of robo advice tools available in Australia.
The most obvious target for a robo advice tool is the Millennials (those born between 1980 and 2000). They are our first generation of digital natives and so are most likely to embrace the use of an online tool to manage their investments. The low cost of robo advice as compared to a traditional financial adviser is also likely to be appealing to this tech-loving, phone-clutching, bargain-hunting generation.
Millennials are a generation worth capturing. They are the largest generation in history (in the United States there are 92 million Millennials to 77 million Baby Boomers) and they are rapidly accumulating assets (as a generation they currently have more than $2 trillion of assets, a figure which is expected to grow to $7 trillion over the next five years).
But robo advice tools have far broader potential than the tech savvy Millennial. Superannuation funds are looking to robo advice tools to give their members more control over their superannuation, and robo advice will appeal those burnt or distrusting after the recent financial planning scandals in Australia. Financial advisers’ loss will be robo advice’s gain.
This does not mean that robo advisers will completely replace human advisers. In a survey conducted by Midwinter of 288 advisers 45% of respondents also saw robo advice as a technology tool for advisers rather than simply as advisers’ competition. In the US, while the amount of assets under management by robo advisers is growing at a rapid rate it is still dwarfed by the size of the assets under management of traditional funds managers. In July 2014 the 11 leading start-ups in the robo advice space managed $15.7 billion in client assets as compared to the $17 trillion that traditional managers had under management.
It is also likely that there will always be a segment of the market that would prefer to interact with a real person. This may be a slightly older, slightly wealthier demographic, or simply those who enjoy strong, trusting relationships with their financial advisers.
But part of the appeal of robo advice tools is that they can be used in conjunction with an adviser. This is the model that Vanguard has successfully adopted in the US. As of February 2015, Vanguard had $4.2 billion in assets under management through its robo advice tool. When used in conjunction with an adviser a robo advice tool is also a useful compliance mechanism – keeping a detailed record of a customer’s objectives, financial situation and risk profile and providing a check on what the adviser has recommended.
What is a robo advice tool?
There are many different definitions but one of the most common is an online tool that provides automated, algorithm-based advice without or with the limited use of human financial advisers.
While the US leads the charge in robo advice tools there are a range of different tools currently available in the Australian market. Some of the simpler ones are no more than financial calculators allowing the user to see the results of a particular strategy. The more complex tools collect detailed information about an individual’s objectives, financial situation, and risk profile and then recommend an asset allocation or strategy that will meet the investor’s risk profile and objectives. Some of the tools also recommend particular products to meet that asset allocation, and others facilitate the whole thought-to-investment process by offering execution services (often through a third party).
There are also some interesting developments in the US where they are starting to use cognitive computing and big data to inform the advice.
How are robo advice tools regulated in Australia?
There is no specific regulatory framework for robo advice tools in Australia; instead robo advisers must fit themselves within the existing regime for financial advisers – primarily Chapter 7 of the Corporations Act 2001 (Cth). In its submission to the Financial System Inquiry, the Financial Planning Association called for a review of this approach and acknowledged that there may be a need for specific regulation.
Many of the robo advice tools currently available in Australia purport to only provide general advice rather than personal advice. This means that they do not have to generate a statement of advice or comply with the best interests obligations under Parts 7.7 and 7.7A of the Corporations Act.
Given the level of information that most tools collect about the individual it is not entirely clear how they remain within the scope of the definition of “general advice”.
There appear to be a few options but each requires a broad interpretation of the current exemptions and regulator guidance. For example, it may be possible to interpret the existing financial calculator relief (see ASIC Class Order 05/1122) and asset allocation exemption (see regulation 7.1.33A) in a way that means that no financial service is provided. It may also be possible to rely on ASIC’s statements in Regulatory Guide 244 to frame the advice as general advice and argue that the personal information is being used to provide general advice that is “more relevant to the client”.
Undoubtedly there are risks in taking any of these approaches without understanding ASIC’s view on this issue. To date ASIC has not publicly expressed a view on how the current general advice framework applies to robo advice tools. However, ASIC officers have expressed a willingness to work with tool developers and to grant exemptions where appropriate.
For those robo advice tools that provide personal advice without an adviser there are also interesting questions raised by the application of the existing regime. For example:
- how can the best interests obligation be satisfied– can an automated tool determine whether the information provided by the client was incomplete or accurate in the same way that an adviser may be able to?
- how can the appropriate advice obligation be satisfied – can an algorithm do this on its own or would it need to be reviewed by a human adviser?
- who needs to meet the training requirements – the creator of the algorithm?
Where to from here?
There is a clear case for the use of robo advice tools in the Australian market. They’re cost effective, available 24 hours a day, and characterised by slick design. These tools enable individuals to get on top of their finances in a quick and intuitive way, often with colourful representations of asset allocations or projections of future income which can be varied with the click of a button. Getting engaged with your investments has never been so appealing.
While there are some questions about how they fit within the existing regulatory framework, these are questions that should be capable of being worked through with the regulator to develop a sensible solution.